On 1 June 2011, Fed Vice Chair Janet L. Yellen delivered a speech on Assessing Potential Financial Imbalances in an Era of Accommodative Monetary Policy at a Bank of Japan conference in Tokyo.

The speech does not mention the word 'bubble' even once but she was obviously referring to bubbles when she said:

"The severe economic consequences of the recent financial crisis have underscored the need for central banks to vigilantly monitor the financial system for emerging risks to financial stability. Indeed, such vigilance may be particularly important when monetary policy remains highly accommodative for an extended period. As many observers have argued, an environment of low and stable interest rates may encourage investor behavior that could potentially lead to the emergence of financial imbalances that could threaten financial stability."

Elsewhere she said:

"A sustained period of very low and stable yields may incent a phenomenon commonly referred to as 'reaching for yield,' in which investors seek higher returns by purchasing assets with greater duration or increased credit risk."

This is quite a change from, say, Ben Bernanke's statement on Asset-price "bubbles" and monetary policy on 15 October 2002:

"First, the Fed cannot reliably identify bubbles in asset prices. Second, even if it could identify bubbles, monetary policy is far too blunt a tool for effective use against them."

Or from Alan Greenspan's statement on 17 June 1999:

"But bubbles generally are perceptible only after the fact. To spot a bubble in advance requires a judgement that hundreds of thousands of informed investors have it all wrong. Betting against markets is usually precarious at best."

The rest of Yellen's speech is devoted to the parameters the Fed is keeping track of to ensure that there are no financial imbalances and concludes that though there is the stray worrying sign, overall there are no significant imbalances.

From the graph of Corrected Money Supply (M_c) that I have constructed I would seriously doubt this.

The steep rise in M_c in recent months and the fact that banks aren't doing much lending to firms suggest that their profits are coming from trading and taking on risk assets.

I am really curious to know why the large banks are cutting back on staff just after they've made such huge profits. Is it a sign that they are in trouble?